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On Entrepreneurship, Private Equity, Venture Capital, M&A and Business Trends in India.
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September 30, 2006

"Indians now purchasing higher value products online"

Businessworld has an article with data on the e-commerce market in India.

Major online shopping sites Fabmall, Rediff, Indiatimes and Sify report that during 2005-06, Indian consumers have spent Rs 1,180 crore, more than double the Rs 570 crore netted during 2004-05. The Internet and Mobile Association of India (IAMAI), which collated this data, says that over the past two years, online purchases have grown nearly four-fold from 200,000 (in 2002-03) to 790,000 in 2005-06.

But according to the latest figures from Internet & Online Association of India (IOAI), 40 per cent of online shoppers said they bought electronic gadgets online. “The perception that electronic items need to be ‘touched’ before buying has changed. Whether you buy a microwave at Fabmall or at a brick-and-mortar shop makes no difference, unless you get an electrician to test the oven,” says K. Vaitheswaran, CEO, Fabmall.

"This time, it's different"

Businessworld has a cover story on the resurgence in tech entrepreneurship in the country. The article points out painstakingly why things are different this time around compared to the last wave in the late nineties.

In Bangalore, 250 new startups have sprung up since January. TiE’s (The Indus Entrepreneurs’) Bangalore and Mumbai chapters have seen a spurt in attendance at their events. “Suddenly, we’re running out of seats. Six months ago, it was difficult to fill even 20,” says Sridhar Mitta, who heads TiE Bangalore. IIM Bangalore’s entrepreneur club has had similar experiences. “Membership has jumped significantly in the last 12 months,” says Kalyani Gandhi, head of the Nadathur S. Raghavan Centre for Entrepreneurial Learning (NSRCEL). IIT Madras is incubating six new startups. And back in Mumbai, SINE is incubating 16, the highest it has seen since 1999-2000.

...This brings up the first big difference from the dotcom era. While that phase saw innovation mostly around one opportunity, the Internet, this time it is spread across six — consumer Internet, semiconductors, gaming and animation, wireless communication, SaaS (software-as-a-service), and telecom and software products. The diversity helps in a couple of ways. One, each segment is at a different stage of maturity and the business models are still being defined. That gives entrepreneurs more space to innovate. Take semiconductors — much of the work centres around back-end chip design. Example: the chip that runs Apple’s iPod was fine-tuned by Hyderabad-based Pinexe Systems. The chip itself was manufactured in Taiwan because India does not have a manufacturing base yet. Companies like inSilica and MosChip are betting on this space. Second, since some segments are more nascent than others, it lengthens the period of innovation, making this resurgence more sustainable. The odds for throwing up world-class technology leaders are, therefore, that much higher.

We picked three areas that already have the potential to produce winners — consumer Internet, wireless communications and SaaS. Over the past couple of years, these segments have experienced one big change — the emergence of a large and growing domestic market. Take the consumer Internet space. In the past six years, India’s Internet user base has jumped from 1 million to over 35 million on the back of increased broadband penetration and PC usage. In the near future, most Indians may access the Internet from their mobile phones. This implies a combined Internet user base of over 150 million. Service providers like Airtel and Hutch have started offering subscribers value-added services that enable even banking transactions on mobiles using the Internet.

The Businesworld website has an accompanying article profiling a few of the new techology start-ups mentioned in the cover story.

September 24, 2006

"Reach of English language media - including online - capping out"

Anand Sridharan quoting National Readership Study 2006 points out that "without significant inroads into vernacular content and reduction in bandwidth/PC costs" the size of Internet users in India is not going to be too exciting.

* English daily readership has been stagnant at 21 mn and makes me realize how small the 'People Like Us' segment really is. I also worry about our BPO sector that is estimated to have 1 mn people by 2008. By the time we apply an age-filter and a quality-filter to the English speaking universe (of which English daily readership appears to be an indicative proxy), the math to get to 1 mn seems touch-and-go.

* The internet numbers are much lower than the frequently quoted 38 mn. The English daily readership is indicative of how far internet in its current form can go, without significant inroads into vernacular content and reduction in bandwidth/PC costs.

"Notoriety is not a bad thing": Air Deccan CEO

Businessworld has an combative interview with Captain G.R. Gopinath, Founder & CEO of Air Deccan, the pioneering low-cost airline which is, unfortunatly, best known these days among travellers for its delayed take-offs and cancellations.

Notoriety is not such a bad thing. Converting it into fame requires just some tweaking.

Anyway, next financial year, we will overtake Jet in terms of market share (with 57 aircraft). It is inevitable. Growth cannot be stopped. Stopping growth will be the end of me. Once you have the market share and this irrationality stabilises, you just have to tweak your fare by a few hundred rupees to get into profits.

That’s what Airtel did. They were under loss. They continued to expand and buy companies. They worked on getting a larger and larger market share. Once you have control of the market, you just have to tweak the fares slightly. It’s a volumes game. In that desperate run, there are bound to be operational problems.

India's epinions

Business Today has an article (in its personal finance section) on Indian consumer rating web sites.

"We are trying to create a network of consumers who can trust each other and their opinions on brands, products and services," says Faisal Farooqui, CEO, mouthshut.com, a pioneering website in this area. Mouthshut, started in 2000, today has a million registered members, with reviews on over 75,000 products and services.

... The best part of such sites is that companies are also checking them out to see what's being written. Both mouthshut and indiaresortssurvey have had instances when companies have written in after reading a review, asking to talk to the consumer and clarify an issue.

...Mouthshut is launching a subscription-based corporate section, where companies will be able to post information, clarifications and address grievances.

Can Centurion Bank pull off its latest merger?

Businessworld has an article comparing Centurion Bank's latest acquisition of Lord Krishna Bank with its previous merger with Bank of Punjab.

Clearly, the Centurion Bank-BoP merger has been an unqualified success.

Will the CBoP management repeat that feat with LKB? Analysts say that with a swap ratio of seven shares of CBoP for every five shares held in LKB, the deal values LKB at 1.7 times book value or 3.0-3.5 times adjusted book value after taking LKB’s NPAs and other likely write-offs. Recall that the BoP merger was at around 1.9 times reported book value. Enam Securities points out that the deal is attractive because it adds about 20 per cent to CBoP’s assets, while the acquisition cost is about 9 per cent of the current equity shares of CBoP.

...The big question is: will CBoP be able to integrate the LKB employees, who are a very different breed from the young, gung-ho employees of BoP? In fact, at the time of writing, LKB employees were on indefinite strike protesting the merger and demanding instead a merger with a public sector bank. The bank is plagued with four major unions, which have come together under the banner of the United Forum of LKB Unions (UFLU). It’s a very different world from CBoP’s. Even if CBoP persuades the unions to come on board and successfully manages the political opposition, integration will be difficult.

September 23, 2006

Hedge fund Amaranth Advisors faces blow-up

US-based hedge fund Amaranth Advisors, which made an investment in Indiabulls Finance Company (a consumer lending subsidiary of Indiabulls Financial Services) in June 2005, has landed itself in deep trouble following reckless trading in natural gas futures. The firm is now selling assets in order to stay afloat.

Amaranth said Thursday that its portfolio, worth $9.2 billion on Aug. 31, had lost 65 percent in value after bad bets on natural gas prices and the subsequent sale of its energy portfolio.

...Amaranth began incurring large losses on its natural gas portfolio in the week starting Sept. 11, and on Sept. 14, Amaranth lost roughly $560 million on its natural gas position as prices for the commodity plummeted. Faced with big margin calls on natural gas positions and unable to borrow more to finance them, Amaranth sold its positions.

The article points out that RAM Energy Resources Inc., an oil and gas exploration firm which had received an investment from Amaranth, has bought the hedge fund's stake.

Amaranth, which was RAM's fifth-biggest shareholder, sold all 739,175 of its shares - about 2 percent of RAM's total shares outstanding - back to the company in a negotiated transaction, RAM said.

RAM's stock had sunk 12 percent this week on speculation that selling by Amaranth would reduce the price. The announcement drove the shares up 6.4 percent, their biggest gain in three months.

Indiabulls Financial Services and its subsidiaries have received several rounds of funding from another US-based hedge fund, Farallon Capital.

Related Stuff:

The Globe and Mail, quoting industry observers, says the US Securities and Exchange Commission has launched a probe of Amaranth and that "this will be the impetus for regulators to finally crack down on the (hedge fund) industry and demand better transparency".

The Globe and Mail (G&M) article, as well another article in Washington Post point out that Amaranth landed in trouble because it violated the very raison d'être for hedge funds: to hedge.

Amaranth didn't fall apart because it was acting like a traditional hedge fund. It fell apart because it wasn't.

A lot of the blame for Amaranth's blow-up is being placed on the firm's star energy trader, Brian Hunter.

From Wash Post:

(Amarath CEO Nicholas Maounis) let Hunter increase the size of his natural gas positions so that they became more than half of the entire firm's exposure, even though Amaranth claimed to be a "multistrategy" fund. Before Hunter's arrival, all commodities positions made up about 20 percent of Amaranth's portfolio, natural gas no more than 7 percent.

In an intresting sidelight, the G&M article also points out how Amaranth's headquarters - the town of Greenwich, Connecticut - is home to some 200 hedge funds which control some $120-billion worth of assets (or about 10% of the global hedge fund industry).

The Wash Post article points out that Hunter replaced Harry Arora, a former Enron Corp. energy trader, as head of Amaranth's energy trading desk. The "relatively conservative" Arora "had a falling out with Maounis and Hunter over the risks the firm was taking" and left. He now heads another commodities hedge fund ARCIM Advisors, headquartered in - you guessed it - Greenwich, CT.

September 17, 2006

Is corporate India ripe for hostile takeovers?

Business Today has an article on this topic including a box item on the history (or the lack of it) of hostile takeovers in the country.

India is a market global giants can't ignore. And low promoter holdings at a score of India's most respected companies, many of them a part of India's biggest conglomerates, make them sitting ducks for prospective raiders, global or Indian. That foreign institutional investors (FIIs) and private equity (PE) players are sitting on chunks of shares-in many cases their collective holding is more than the promoter group itself-makes for a compelling case for a corporate raid from within or without. And of course there are those blue-chips that have no promoter, and are deemed to be "professionally-run". Have a look at the menu on display: HDFC (Housing Development Finance Corporation), the pioneer in home finance, which has also spawned a bank. It has no promoter, and a string of FIIs are clutching onto close to 68 per cent of the institution's equity. Then there's engineering and construction giant Larsen & Toubro (L&T), a professionally-run company in which banks, financial institutions (FIs), mutual funds (MFs) and FIIs collectively hold a little over 55 per cent. And there's a long list of companies in key sectors like it services, infrastructure, automobiles, cement, metals and banking where the promoters' stake is dwarfed by the holdings of institutional players. "The worry is for companies whose business doesn't depend on promoters and who have huge assets and a strong brand name," says Ambareesh Baliga, Vice President, Karvy Stockbroking.

The first high-profile unfriendly attempt at an acquisition can be traced back to non-resident Indian tycoon Swraj Paul in the early 1980s when he had a go at Escorts and DCM. However, he had to beat a hasty retreat thanks to resistance from startled Indian business houses and the draconian Foreign Exchange Regulation Act (FERA, which was finally dust-binned in 2000). The late Manu Chhabria met with some success, acquiring professionally-run companies like Shaw Wallace and Dunlop (ironically, another predator, the UB Group's Vijay Mallya, took over Shaw Wallace last year after Chhabria's death).

To be sure, the low promoter holdings of Indian family businesses have invited persistent interest from wannabe raiders. And that activity has intensified in the past six years. In 2000, a corporate greenhorn Abhishek Dalmia picked up 10.5 per cent in Gesco Corp., the real estate arm of Great Eastern Shipping, via his Delhi-based investment firm Renaissance Estates. He went on to make an open offer to acquire 45 per cent of the company, but the Mahindras threw their hat in with a counter-offer at a higher price. After a few more offers and counter-offers, the Mahindras and the Sheths of GE Shipping settled to buy out Dalmia's 10.5 per cent stake. Dalmia didn't get the company, but he made a killing (a 50 per cent appreciation of his original investment), as did minority shareholders.

Why is Cairn Energy listing in India?

Business Today has an article on why the LSE-listed oil firm, Cairn Energy, is planning a public issue in India.

Cairn Energy Plc is the company in question, and the simple fact that 90 per cent of its current market value can be traced back to its Indian operations could be one reason for the company's decision to list in India. Another could be the company's decision to invest $1.5 billion or Rs 7,050 crore (on behalf of the whole project), over the next 30 months in Rajasthan where its discoveries add up to a significant 1 billion barrels (recoverable oil); at its peak production, the company's Rajasthan fields should produce a little over 54 million barrels a year. Neither of these reasons, however, seem to be relevant. International investors seem to understand the oil business better and value firms in the sector higher (ONGC's forward price-earnings multiple, for 2006-07, is a mere 9.49 by some estimates); and Cairn recently tied up some $1 billion (Rs 4,700 crore) in debt to fund its plans for Rajasthan.

The real reason, claim analysts who point out that Cairn is "an M&A amenable company", is that the IPO could serve as a valuation exercise in the run-up to a sell-off.

FCCBs losing sheen

Business Today points out that FCCB issues, which were ruling high in 2005, are now losing favour with companies.

By the second half of 2005, FCCBs had become very popular: between October 2005 and May 2006, when the equity markets went into a tailspin, 67 companies raised a total of $6.244 billion (Rs 29,346.8 crore at today's rate). Unfortunately for companies, the dollar has gained against the rupee in the past few months and the US Federal Reserve has taken an interest-hardening stance.

..."The real impact is on pricing," adds Gunjan Shah, Partner, Amarchand Mangaldas. "Zero coupon bonds are not marketable anymore." New issues, then, are happening at higher interest rates and redemption premia, making them far less attractive. The worst-hit are small cap (market capitalisation) companies that raised the maximum amount possible, 25 per cent of their market value at that point. They issued FCCBs at prices close to their peak prices and at a significant conversion premium of between 30 per cent and 40 per cent; with prices having corrected by around 20-30 per cent, the conversion premium has zoomed.

Online classifieds: The rise of the dotcoms

Businessworld has an article on how Indian online services are taking marketshare away from newspapers and how newspaper publishers plan to respond.

Three years ago, Canon India spent Rs 30 lakh a year on recruiting through job consultants and classifieds in the print media. In 2006, 30 per cent of its recruiting is done online through sites like Naukri and Monster, besides its own site. The total cost has come down to Rs 10 lakhs. “We have almost stopped using print classifieds,” says Alok Bharadwaj, vice-president, Canon India.

...The Internet and Mobile Association of India estimates that in 2005-06, advertisers spent Rs 200 crore on classified advertising (jobs and matrimonial) online. This is growing at 70 per cent a year. In comparison, classified advertising in print stood at an estimated Rs 500 crore in 2005 and is growing at 20 per cent a year. At this rate, it is just a matter of time before the online classified ad market overtakes its print counterpart....

September 09, 2006

VeryScarry.com: Indian Web 2.0 cos. are all over the media

Businessworld has a feature profiling some Indian Web 2.0 companies including a "box item" on Who Will be India’s Myspace.

Extracts:

Myspace owes much of its popularity to the thousands of bands that host their music online and their fan clubs. Sixer is hoping to achieve the same with cricket.

www.sixer.tv is a social networking site for global cricket fans — a platform for cricket lovers to connect with other local fans, teams and clubs. They can schedule matches, chat during live games, showcase their cricket skills and highlight their performances by uploading videos. Unlike Yaari, Sixer has a large investor — San Francisco-based Linus Capital. Another interesting development is that entertainment site WahIndia has received angel funding to launch a social network focused on Bollywood films, celebrities and fans. It plans to monetise this online community through downloads of films, music, ringtones, wallpapers and other premium digital content.

Matrix Labs' Prasad: India's best deal maker?

I do not know of any other Indian company which has grown as aggressively through M&A as Matrix Labs. Businessworld tells the story of Matrix Labs and its Founder-Chairman N. Prasad here and here.

Extracts:

Over the last five years, Matrix has acquired and picked up equity in seven companies including Docpharma (Europe) and Mchem (China), and a joint venture with Aspen Labs (South Africa). In India, it started with a stake in Plant Organics and then Herren Drugs, Vera Labs, Vorin Lab, Fine Chemicals, Medicorp and Concord. Matrix ended 2006 with consolidated revenues of Rs 1,158.61 crore. To reach this far, it takes a company at least 15 years; Prasad has done it in five.

...Recalls Rajiv Malik, who was with Ranbaxy and also on the board of Vorin: “Prasad looked for opportunities at every turn. Even when he was an API (active pharmaceutical ingredient) supplier, he was setting his sights on the next step, that of supplying APIs to the regulated market.” Ranbaxy was doubtful since Matrix had no US FDA approved plant. But Prasad resurfaced within two months with Medicorp, which had a US FDA approved plant. “Move at lightning speed if there is an opportunity has been his credo,” says Malik.

September 08, 2006

New exit route: Sell your company on eBay

Michael Arrington of Techcrunch has a post describing how Kiko, a web calendar company, got acquired for $250,000 by listing itself on eBay and addss that this might be a good exit route for Web 2.0 companies.

I think the transaction, and others like it, might signal a trend in the new web. Is eBay the investment bank of Web 2.0? New companies are easy to start, easy to fund and (now) easy to sell for a few hundred grand on eBay…this might be the way many of these small companies eventually find liquidity.

September 03, 2006

Infosys' "Think Flat" corporate blog

IT outsourcing giant Infosys has launched a blog titled Think Flat at www.infosysblogs.com/thinkflat with a opening post by CEO Nandan Nilekani (which has attracted 26 comments as of now).

At Infosys, we have had the privilege of looking at these changes from a very different perspective – from the other side of the world. And, we would agree with much of what (Tom Friedman) says (in "World is Flat"), though we respectfully disagree on some points. This conversation, then, is about the Infosys perspective on what we believe companies must do to compete (and win) in the changing world.

We call our perspective “Think Flat”, because we believe this change is as much about changing the business mind-set as it is about changing our strategies and operations. Businesses that can quickly grasp the impact of the changing business world and respond to its threats and harness its opportunities are the ones that will succeed.

Can Air Deccan overcome the competition?

Business Today has a profile of low-cost airline pioneer Deccan Aviation post its turbulent May IPO.

To put it simply, while Deccan is low fare, it's not quite low cost. Blame it on the nature of the industry and Deccan's own peculiar problems. Running an airline is an extremely capital-intensive proposition. It costs anywhere between $225,000-$325,000 (Rs 1.06-1.53 crore) per month to lease an Airbus A320, which is what Air Deccan flies on longer routes. Maintenance costs (including mandatory 'maintenance reserve') can be as much as $150,000 (Rs 70.5 lakh) per plane for labour charges alone, with spares being billed additionally. Employee costs (essentially pilot wages) can be as high as 11 per cent of operating revenues. Fuel costs take another third off the revenues. Do the math, and this is how Deccan's costs are expected to break up as a percentage of revenues in 2005-06: Fuel, 47 per cent; lease rentals, 15 per cent; employee and maintenance expenses about 10 per cent each; and commissions about 5 per cent.

...Gopinath knows only too well that market share alone does not mean much. To become a profitable low-fare airline, Deccan needs to wring cost out of its system. In fact, that was the primary idea behind the IPO. For instance, of the Rs 373 crore raised, Rs 133 crore will go towards repaying debt, saving Deccan Rs 8-9 crore in annual interest charges. Brady also says that the airline will invest about $25 million (Rs 117.50 crore) over the next couple of years in a 60,000-sq. ft hangar in Chennai, engineering facilities and a pilot training centre in Bangalore or Hyderabad. "The hangar facility is important for us to undertake routine maintenance in-house to cut costs," says Andy Daines, Vice President (Engineering).

Why Warburg Pincus is attracted to Amtek

Business Today has a short profile of auto components maker Amtek Auto in which Warburg Pincus recently picked up a 9% stake.

Amtek, which started operations out of Sohna in Haryana in 1987, supplies vital components to a host of global and local auto components, totalling at least 52 major brands across the world, including Aston Martin and all. Amtek's components, ranging from cylinder bocks to transmission heads to gear shifters, can also be found in sporty Jaguars and BMWs on Germany's Auto Bahn. And of course in India's favourite, Maruti Suzuki.

... Amtek has been chasing growth aggressively-revenues were up 62 per cent for the June quarter-organically and inorganically, back home and overseas. Recently Amtek acquired Akiel Castings in Pune and Amforge's con-rod division in Delhi. Global operations pitched in with 53 per cent in the June quarter; the figure was even higher in the March quarter, at almost 55 per cent. Next stop? "Mexico and East Europe," says Arvind Dham, Chairman and Managing Director, Amtek Group.

Recently Amtek had reportedly emerged as the highest bidder for JL French Automotive Castings Inc.'s Whitham plant in Essex in the UK, pipping Swraj Paul's Caparo Group. A final announcement in this regard is expected soon. Amtek is also said to be eyeing a machine component unit abroad for about $250 million (Rs 1,175 crore). It could also acquire a casting firm for about $20-25 million. Cash isn't a constraint. Amtek had mopped up $250 million (Rs 1,125 crore) through five-year convertible bonds in May and has cash reserves of another $100 million (Rs 450 crore).

Fabs on hold

Businessworld has an article on how due to deays in announcement of the national semiconductor policy has caused the plans of two large chip manufacturing projects in Hyderabad - NanoTech Silicon India and SemIndia - to be placed on hold.

According to sources in the government, the ministries of finance and IT have developed differences over the sops and concessions to be offered, and Communications & IT minister Dayanidhi Maran has sought the prime minister’s intervention. However, a final decision can be taken only after the current session of Parliament.

The delay has meant that SemIndia and NTSI are unable to attain financial closure (finalising agreements with investors, partners, suppliers and customers). Quick financial closure is important, because a new fab requires quite a bit of time to start making money.

"The Shenzhen of India"

Businessworld has an article on how Sriperumbudur (40 km from Chennai) is emerging as India’s telecom manufacturing hub.

There are three types of operations coming up at Sriperumbudur. One, the OEMs like Nokia and Motorola. Then the EMS’ like Flextronics and Foxconn, who supply to OEMs around the globe. Finally, there are the component suppliers who work either with the OEMs or the EMS’. They include Aspocomp (global turnover euro 154 million; printed circuit boards), Salcomp (euro 156 million; chargers), Perlos (euro 667 million; mechanics) and Sanmina-SCI ($12.2 billion; network components).

Each of these outfits will be housed within an SEZ. Apart from them, Velankani Information System (which has set up an IT park in Bangalore that houses Siemens, Elcoteq and Patni Computers) is setting up an ITES SEZ that will house a 5 million-sq. ft manufacturing facility for another set of 20 global telecom suppliers.

...It is great to have telecom majors set up a base in the neighbourhood. But a mobile phone has close to 200 components that need to be readily available. The big boys need a regular supply of components.

Nokia has lined up a dozen vendors who will start manufacturing components in its 210-acre campus. That will meet some of Nokia’s needs. It will yet need more components. It is this need that the Velankani SEZ plans to meet. With an investment of Rs 900 crore in a 250-acre campus in Sriperumbudur, this generic SEZ with 5 million sq. ft will house between 20 and 30 global component suppliers in the next couple of years.

Will Kishore Biyani's big bets pay off

Businessworld has a cover story on retail pioneer Future Group's (formerly Pantaloon) ambitious moves to scale up in the face of rising competition.

Moreover, as Pantaloon scales up, it has to ensure that its vendors keep pace. Therefore, it often provides them the necessary management and financial support via the group’s private equity initiative, the $400-million Indivision fund. Pantaloon gains from asset management fees and a share of the profits the fund makes.

So far, the limited experience of such investments in companies like Indus League (it owns apparel brands like Scullers and Indigo Nation) and Capital Foods (Smith & Jones ketchup and Ching’s Secret noodles and Chinese sauces) has been promising. Indus League has turned around its loss-making operations, boosting sales five times since investment. Capital Foods is expected to triple sales and profits this year.